Tax Insights

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What every trustee should know: the 65 day rule

Trustees interested in managing the tax burden of a complex trust should be familiar with the 663(b) election, also known as the “65 Day Rule”. Making this election can often help to lower the overall tax burden of the trust and its individual beneficiaries.

Trusts pay the highest tax rate at the very low amount of $12,300. Compare this to an individual’s 2015 tax rates:

Top Federal Rate of 39.6%Net Investment Income Tax of 3.8%
Trusts at $12,300Trusts at AGI of $12,300
Single Individuals at $413,200Single Individuals AGI of $200,000
Married Filing Joint at $464,850Married Filing Joint AGI of $250,000

When individual beneficiaries have a lower tax rate than the trust, income distributions made to these beneficiaries (and then taxed to the beneficiaries instead of the trust) may result in a net tax savings between the trust and the beneficiaries.

If the trustee finds there is excess income remaining after accounting for the year’s distributions, the 663(b) election or “65 Day Rule” allows the Trustee to treat distributions made within the first 65 days of the following year AS IF the distributions were made in the prior tax year.

So for example, a trustee could make additional distributions through March 5, 2016 and elect to treat the distributions as if they were made in 2015 and are a distribution of 2015 income.

The 663(b) election is made on the second page of Form 1041. Be sure to keep track of which distributions were “included” in the prior year if the election is made.

The 663(b) election or “65 Day Rule” allows trustees additional flexibility to manage the tax liability of a complex trust and its beneficiaries.

Melinda Nelson, CPA